How to Underwrite a Deal Without Falling for “Potential Rent”

[James Jones]

One of the fastest ways to lose money in real estate is underwriting based on fantasy. Sellers love quoting “potential rent,” wholesalers love inflating ARVs, and new investors love convincing themselves they’ll magically hit top-market numbers. But none of that pays the mortgage.

If you want predictable cash flow, you underwrite deals based only on what the property can realistically produce the day you buy it. Not hypothetical. Not “after a few upgrades.” Not “once you raise tenants.” Reality.

Here’s the framework we use:

1. Ignore future rent. Underwrite today’s rent.

If the property is already rented, use current rent.

If it’s vacant, use the actual verified program rent for its current bedroom count.

Not “maybe you can get 3-bed pricing once you add a wall.”

Not “market comps say you could get more.”

Reality only.

2. Underwrite based on rent-ready, not fully renovated.

Most investors run numbers as if the rehab is already done. Wrong.

Underwrite the deal as-is.

Then add rehab, holding, and turn costs separately.

This keeps you honest.

3. Verify Section 8 rents before you even walk it.

Memphis has clear ranges. You either know the payment standard or you don’t have a deal. We always confirm the actual rent that MHA will approve for that zip code and bedroom count.

4. Always stress-test the deal.

We run numbers three ways:

• Worst case: inspection delays, tenant slow approvals

• Base case: regular turn, normal rent

• Best case: new voucher, max allowable rent

If it doesn’t cash flow in the base case, we’re not interested.

5. Don’t assume rent increases will save the deal.

MHA does raise rents, but that’s a bonus, not a plan. If you need a future rent increase to break even, the deal is already broken.

6. Use conservative vacancy and maintenance numbers.

• Vacancy: minimum 5%

• Maintenance: minimum 10%

Distressed properties need even more. Investors lose money because they ignore these.

The formula is simple:

Underwrite reality. Execute consistently. Let appreciation be dessert, not the meal.

What’s the most unrealistic “potential rent” number you’ve ever seen on a deal sheet?